The Top Gun Sector

Negative flows in the IA Targeted Absolute Return sector reflect the inability of its funds to deliver on investors’ expectations. Which begs the question, were those expectations realistic, and shouldn’t those nurturing them have known?

Fund flows began to slacken in 2016, and the sector has seen outflows every quarter but one (Q2 2018) since Q3 2017. This is exemplified by the experience of its former star player, the ASI Global Absolute Return Strategies (GARS) fund.

Between Q2 2016 and Q3 2020, GARS saw an eye-watering £22.8bn of net outflows. As an economist I once worked with never used to tire of saying, that’s a good night out. It’s more than the rest of the sector saw leave over the same period (£21.4bn). This indicates that much money circulated around the sector before heading out the door.

For example, the Invesco Global Targeted Returns fund carried on in positive territory until Q4 2018, since when it has had unbroken quarterly outflows totalling £5.3bn.

Let the Good Times Roll

Being old enough to remember Long-Term Capital Management, I’m always a little suspicious of financial engineering that promises that the (albeit moderately) good times will trundle on—and on. They seldom do.

The commitment of the sector to deliver “positive returns in any market conditions” is ambitious. So ambitious that whoever drafted the definition added “returns are not guaranteed”, and that funds “may aim to achieve a return that is more demanding than a ‘greater than zero after fees objective’” in a period no longer than three years.

So, you may make more than nothing over the three-year period. But no guarantee.

Many Paths, Same Moon

We need 17 Lipper classifications to cover the sector. Given that it has only 84 funds, that indicates the many styles represented: from long-short equity over a variety of regions to global bonds.

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